Debt to Income Ratio
Lenders use a ratio called "debt to income" to decide the most you can pay monthly after you've paid your other monthly debts.
About your qualifying ratio
Typically, underwriting for conventional loans needs a qualifying ratio of 28/36. FHA loans are less strict, requiring a 29/41 ratio.
The first number is the percentage of your gross monthly income that can go toward housing costs. This ratio is figured on your total payment, including hazard insurance, HOA dues, Private Mortgage Insurance - everything that makes up the payment.
The second number is what percent of your gross income every month which can be spent on housing costs and recurring debt together. Recurring debt includes things like car loans, child support and credit card payments.
For example:
28/36 (Conventional)
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers with your own financial data, we offer a Mortgage Loan Qualification Calculator.
Just Guidelines
Remember these ratios are just guidelines. We will be happy to help you pre-qualify to determine how large a mortgage you can afford.
BeneGroup, Inc. can answer questions about these ratios and many others. Call us at 4083956018.